Pension Buyouts and Lump-Sum Payouts Expected to Increase

You have heard about underfunded pension plans and pension news during bankruptcies for years now. It turns out that pension plans in corporate America are likely to keep shrinking. After 2012 was called a “watershed moment” as numerous companies decreased their pension risk exposure with one-time lump-sum pension payouts, now a survey by Aon Hewitt predicts that even more employers are planning to make similar cuts in 2013.

The survey was based on 230 U.S. employers with defined benefit plans. What is amazing is that the 230 groups represent nearly five million employees. A whopping 39% of defined benefit plan sponsors responded that they are “somewhat or very likely to offer terminated vested participants and/or retirees a lump-sum payout during a specified period” in 2013. It was about 7% of defined benefit plan sponsors that added a lump-sum window for terminated vested participants and/or retirees in 2012.

Aon Hewitt believes that 2013 will be the year when many more companies actually implement large-scale actions such as offering lump-sum windows. The report also said that Pension Benefit Guarantee Corporation (PBGC) premiums will begin to increase in 2013 and 2014. That in turn “will increase the carrying cost of pension liabilities and will give retirement plan sponsors an economic incentive to transfer those liabilities off their balance sheet.”

The study showed that a whopping 84% of employers will not make any change to the benefit accruals they offer workers. Of those that are planning changes, only 16% of employers are somewhat or very likely to reduce defined pension benefits. Another 17% are somewhat or very likely to close plans to new entrants in 2013. The report showed that 10% are somewhat or very likely to freeze benefit accruals for all or some participants.

In risk reduction efforts, employers are contemplating what different economic scenarios would mean to their plans. Half of employers are likely or somewhat likely to conduct an asset-liability study in 2013. There is a big difference here between overfunded pensions and underfunded pensions:

Plans that are overfunded likely will take measures to lock in this position and erase future volatility through actions such as offering lump-sum windows.

Underfunded plans will need to take an approach that addresses volatility, such as implementing a glide path investment strategy that will de-risk the plan as the funded position improves.

Pension plans in America are ever-changing. They are also contracting and are becoming an exception rather than the norm.